What Is the Employee Ownership Trust Exemption?
The Employee Ownership Trust (EOT) Exemption is a tax measure that gives individuals (non-trustors) relief from federal capital gains tax when selling qualifying shares of a business to an EOT or worker cooperative. Originally temporary, this exemption is now proposed to be made permanent, under new rules announced in the Spring Economic Update 2026. (budget.canada.ca)
Key Features:
- Applies to dispositions of shares to an employee ownership trust or worker cooperative corporation. (budget.canada.ca)
- Initially available only until the end of 2026, but the government proposes making it permanent. (budget.canada.ca)
- Offers exemption on up to $10 million in capital gains per disposition, subject to qualifications. (budget.canada.ca)
Who Benefits Most
- Business owners considering exiting or transitioning their ownership.
- Employees planning ownership in a company via cooperative models.
- Firms wishing to preserve business continuity and internal leadership over external sale.
How to Qualify: Conditions & Practical Steps
| Requirement | Details |
|---|---|
| Timing | Disposition of shares has to occur after 2023; exemption applies up to end of 2026, with proposals to extend permanently. (budget.canada.ca) |
| Recipient | Must be an employee ownership trust or worker cooperative corporation. |
| Cap | Up to $10 million in gains eligible. |
| Other conditions | Additional legislative rules (such as minimum ownership, business activity, employee participation) apply. Check the final draft rules. |
Examples
Scenario A – Retiring Owner: Jane owns 100% of TechCo Inc., planning to sell to an EOT in late 2026. If she realizes $8 million capital gain, she could use the exemption to avoid federal capital gains tax on this amount—if TechCo meets qualification criteria.
Scenario B – Worker Cooperative: A co-op purchases assets from founders; eligible shareholders offload shares into the cooperative, qualifying for exemption, allowing reinvestment of proceeds into the co-op’s growth.
Actionable Tips
- Due diligence: Ensure business meets all qualifying conditions well in advance. Drafting of legal documents must align with legislation.
- Professional advice: Work with tax lawyers/accountants to structure sale, trust arrangements, and valuations properly.
- Watch timelines: Because full enactment for permanence depends on proposed legislation becoming law, delay could close current window.
Implications and Caveats
- Federal tax savings are substantial; provinces may have separate treatments—check provincial capital gains inclusion rates and exemptions.
- Regular consultation and updates necessary: proposed changes are in Spring Economic Update and require Parliamentary approval. (budget.canada.ca)
- Non-compliance or failing to meet full conditions (e.g., trust structure, employee participation) may disqualify the exemption.
Bottom line: Entrepreneurs planning exit strategies and employees in co-ops have a rare opportunity to leverage the EOT Exemption. With proposed permanency, taking action before end-2026 is likely advantageous.